How is Bitcoin doing in El Salvador?

Bitcoin Adoption in El Salvador.

In a historic move in 2021, El Salvador became the world's first country to officially recognize Bitcoin as legal tender, a decision championed by President Nayib Bukele and approved by the Legislative Assembly of El Salvador. The primary objective was to enhance the economy by increasing accessibility to banking services for Salvadorans and attracting foreign investment. Nevertheless, the adoption has elicited mixed reactions both internationally and within El Salvador, with concerns revolving around Bitcoin's volatility, environmental impact, and the government's fiscal policy transparency.

Background and Dollarization.

Before adopting Bitcoin, El Salvador utilized the colón (SVC) as its official currency until it transitioned to the US dollar in 2001. Dollarization aimed to achieve financial stability and lower transaction costs for international trade. However, it also posed challenges, such as the loss of government control over monetary policy and a fixed exchange rate leading to reduced purchasing power for the population. Remittances, a significant contributor to El Salvador's GDP, were crucial, but financial literacy remained low.

Legislative Milestone.

The incorporation of Bitcoin as legal tender in El Salvador was not a spontaneous decision but emerged as a result of a significant legislative milestone. Proposed by the nation's President, Nayib Bukele, the Bitcoin Law, officially named "Ley Bitcoin", swiftly gained approval from the Salvadoran Congress in June 2021. This legislation sought to harness the benefits of cryptocurrencies, with a specific focus on Bitcoin, to promote financial inclusion and diminish remittance expenses for Salvadorans residing abroad, a demographic that holds considerable sway over the country's GDP.

Bitcoin Adoption in El Zonte ("Bitcoin Beach").

In 2019, the village of El Zonte received a $100,000 Bitcoin donation from an anonymous benefactor, with the condition that El Zonte adopt Bitcoin as a payment method, fostering a circular economy based on the cryptocurrency. Residents, lacking access to traditional banking services, embraced Bitcoin through mobile devices and Bitcoin ATMs, earning El Zonte the moniker "Bitcoin Beach" and serving as a model for using cryptocurrency as legal tender.

Bitcoin ATMs and Chivo Wallet.

El Salvador has been actively deploying Bitcoin ATMs across the country, with a total of 1,500 Bitcoin ATMs in operation. The proud country ranks third globally in terms of Bitcoin ATM installations. These ATMs allow users to buy, sell, and transact with Bitcoin conveniently.
Chivo is El Salvador's official government-backed Bitcoin wallet, which was introduced to facilitate local BTC transactions. The Chivo wallet faced initial challenges, including system issues and missing funds. To address these issues, El Salvador partnered with AlphaPoint, a white-label infrastructure provider. The updated Chivo wallet now integrates with AlphaPoint, aiming for stability, scalability, and social impact.
It allows nearly instantaneous low-fee Bitcoin transactions via QR codes and Lightning addresses. Chivo onboarded 2.1 million Salvadorans within the first month, covering 75% of the population. The application also leverages the Lightning Network, resulting in a 400% increase in payment volume over the past year.

Bitcoin City and Volcano Bonds.

President Nayib Bukele unveiled plans to construct a "Bitcoin City" at the base of the Conchagua volcano in 2021, with funding exclusively through Bitcoin. This city will be powered by geothermal energy and will have no taxes, except for a value-added tax that will fund the city’s services. The concept draws inspiration from ancient Greek city-states, where a unified currency facilitated trade and economic growth. The vision is to establish a vibrant urban center where Bitcoin plays a central role in daily transactions.
Financing the development of Bitcoin City will happen through the issuing of "Volcano Bonds", a type of debt instrument that will offer investors a 10% yield, and will be backed by Bitcoin and the future revenues of the city.

El Salvador's Bitcoin Reserve Assets.

President Nayib Bukele has consistently championed the adoption of Bitcoin in El Salvador. Starting in 2021, he allocated over $120 million of the country's resources towards acquiring Bitcoin. Recently, the value of the 2,764 Bitcoins he procured has exceeded their initial purchase cost, turning the investment into a profitable venture. If he were to liquidate them at present, the potential earnings could be around $3.7 million. This achievement has elicited both commendation and skepticism.

Challenges and Criticisms.

Despite gaining global attention, the integration of Bitcoin in El Salvador has encountered obstacles and faced criticism. A key apprehension centers on the unpredictable nature of Bitcoin prices. Critics contend that the cryptocurrency's volatility could jeopardize the Salvadoran economy, impacting businesses and citizens who may experience abrupt fluctuations in the value of their assets.
Furthermore, certain segments of the Salvadoran population have voiced dissent through protests, expressing reservations about the government's shift towards a decentralized financial system. Some individuals are uneasy about potential repercussions for privacy and are questioning the state's role in supervising financial transactions.

My Thoughts.

I appreciate El Salvador's pioneering stance in embracing Bitcoin. Despite being a small nation, it reflects a typical country that has grappled with its monetary challenges, often dependent on the decisions of the United States Federal Reserve Bank. Through the adoption of Bitcoin, El Salvador has the opportunity to break free from this dependency and pave the way toward a more inclusive financial system, extending its benefits to all its citizens.